Treasury curve close to steepest since May on economic optimism

The difference between the yields on two-year debt and 10-year notes steepened to almost the most since May on optimism the global economic recovery is strengthening, reducing demand for safe-haven assets.

Treasury benchmark 10-year note yields touched a one-week high as demand for Italian bonds at an auction indicated the region’s debt crisis is easing. U.S. government debt declined yesterday after European Central Bank President Mario Draghi said the euro-area economy will slowly return to health in 2013. Italian 10-year bonds extended an advance, narrowing the yield difference, or spread, over similar-maturity German bunds to less than 250 basis points, or 2.5 percentage points, for the first time since July 22, 2011.

“There has been more optimism and increasingly less concern over Europe, and other sovereigns, which have performed better of late,” said Sean Murphy, a trader at Societe Generale SA in New York, one of the 21 primary dealers that deal with the Federal Reserve. “As we get closer to 2 percent, investors will jump back into the market. But, until then, we should see more volatility than people think.”

The 10-year yield fell two basis points, or 0.02 percentage point, to 1.87 percent as of 1:19 p.m. New York time after climbing to 1.93 percent, the highest level since Jan. 4, according to Bloomberg Bond Trader prices. The price of 1.625 percent note due in November 2022 rose 6/32, or $1.88 per $1,000 face value, to 97 25/32.

The yield on the 30-year bond fell three basis points to 3.05 percent.

Yield Spread

Italy sold 3.5 billion euros of debt maturing in December 2015 at an average yield of 1.85 percent, down from 2.50 percent at the previous auction on Dec. 13.

The difference in yields on U.S. two-year notes and 10-year debt expanded to as much as 1.67 percentage points after touching 1.69 percentage points on Jan. 4, the widest since May 4. The average last year was 1.52 percentage points.

U.S. government securities traded close to the least expensive levels in eight months. The 10-year term premium, a model created by economists at the Fed that includes expectations for interest rates, growth and inflation, was negative 0.69 percent. It reached negative 0.68 percent on Jan. 3, the least costly since May.

A negative reading indicates investors are willing to accept yields below what’s considered fair value. The average last year was negative 0.77 percent.